Dave & Buster’s IPO – A Good Deal, Depending on Pricing

We’ve got a sports bar showdown on the horizon: Buffalo Wild Wings (BWLD) vs. soon-to-be-public Dave & Buster’s. And regardless of how you feel about either company’s chicken wings, there’s a lot of debate to be had about which company is a better investment.

dave & busters, bwld stockDave & Buster’s filed its S-1 registration statement with the SEC September 8 — its second attempt to go public since being taken private by Wellspring Capital Management in 2006. But the Dave & Buster’s IPO has stiff competition from BWLD stock, which has outpaced the S&P 500 by 10 percentage points in the past year.

So, you like the sports bar business model and you want to get a piece of the profits. Are you better off going with the streamlined sports bar experience offered by BWLD, or do Dave & Buster’s arcades give the company an edge? There’s no obvious answer, so let’s dig into the financials for each company to see which one is more compelling.

Here’s a closer look at the D&B vs. BWLD showdown.

Dave & Buster’s Valuation

At the beginning of the summer, the Wall Street Journal reported that Dave & Buster’s attracted attention from two private equity firms — Roark Capital, offering close to $1.1 billion, and Onex Corp. (ONEXF) with partner Cineplex (CPXGF) offering slightly more than $1 billion — although neither bid appears to have gone anywhere.

Roark’s bid for $1.1 billion included debt; I’ll assume the same applies to Onex et al. The important thing is this tells us exactly how private equity values Dave & Buster’s. The company has total debt and cash of $528 million and $65 million respectively at the beginning of August, which means  Roark is valuing D&B’s equity at $637 million.

Dave & Buster’s finished its first half of fiscal 2013 with adjusted EBITDA of $75 million. In the 12 months ended February 2, 2014, its adjusted EBITDA was $135, million meaning its adjusted EBITDA in the second half of fiscal 2013 was $60 million, or 44% of the total. If we extrapolate this to fiscal 2014, it can expect 12-month adjusted EBITDA of $159 million. With the enterprise value of $1.1 billion offered up by Roark Capital, the Atlanta-based private equity firm valued Dave & Buster’s at a multiple of 6.9 times adjusted EBITDA.

Let’s see how that stacks up to other options on the market.

How Does It Compare to BWLD?

BWLD stock currently has an enterprise value of $2.6 billion — 11.3 times EBITDA. That’s nearly double what the private equity firms were willing to pay for Dave & Buster’s. On the surface, it seems like an open and shut case — Dave & Buster’s is the better buy.

In its S-1, Dave & Buster’s lists a total of 20 companies in its peer group including BWLD. Two are no longer public companies — CEC Entertainment and Ameristar Casinos — as they were acquired and taken private for 7.4 times and 7.6 times EBITDA, respectively. Add these to the mix and the average multiple of its peer group drops to 9.6 times EBITDA. With the exception of the Bravo Brio Restaurant Group (BBRG), none of the 20 competitors have a multiple lower than Dave & Buster’s.

Of course, the price IPO investors pay and what Roark and Onex were willing to pay are two entirely different matters altogether. Something tells me Dave & Buster’s ultimate valuation is going to be more than $1.1 billion, so let’s try to find more direct comparisons.

Apples-to-Apples

Dave & Buster’s operating income in fiscal 2013 was $51 million on $636 million in revenue. Operating income for BWLD in fiscal 2013 (December year-end) was $101 million on $1.3 billion in revenue. That means the margins are almost identical. However, BWLD posted same-store sales growth 290 basis points higher than Dave & Buster’s in fiscal 2013 at 3.9%.

One of the big differences between the two restaurant chains is that Dave & Buster’s operates company-owned locations exclusively, while BWLD had 579 franchise locations at the end of June to go along with 449 owned by the company. While the revenue streams are slightly different with a franchise/company mix, both are still going after sports fans. In fact, it’s the sports bar concept that’s brought Dave & Buster’s back from the dead. Begun in 2011, D&B Sports is in about half its 69 locations, with more to come in the years ahead.

The other big difference between the two is the fact that Dave & Buster’s attract a gaming crowd. Over half of its overall revenue in the latest fiscal year was from amusement sales, with food accounting for 34% of revenue and alcoholic beverages the remaining 15%. Meanwhile, 80% of BWLDs revenue was from food (primarily chicken wings) and the remaining 20% from alcohol. As Dave & Buster’s grows D&B Sports, it’s likely that its alcohol sales will increase.

What Does This All Mean?

Dave & Buster’s “Eat, Drink, Play and Watch” really came together when it started emphasizing the “watch” aspect of its customer value proposition; the company financials since 2011 bare this out. I never understood why every D&B location wasn’t NFL headquarters come Sunday. It’s a natural fit, given all the stuff going on inside.

But is that enough to buy the IPO? Well, like almost every stock it depends on price.

Let’s assume that Dave & Buster’s sells 10 million shares at $12 per share for gross proceeds of $120 million. Oak Hill Capital, which acquired the company in 2010, doesn’t appear to be selling any of its own shares into the IPO. My rusty math suggests there will be a little less than 160 million shares outstanding after going public, with an enterprise value of $2.35 billion or 14.8 times adjusted EBITDA.

In my opinion, that’s too expensive. I’d be a buyer of Dave & Buster’s IPO anywhere around BWLD’s valuation or lower. Above that, you’re better off buying BWLD stock, instead.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.


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